Fed Chairman Ben Bernanke provided a preview of the Fed's new rules during a speech Tuesday at the FDIC Forum on Mortgage Lending for Low/Moderate Income Households in Arlington, Va. Under the Fed's authorities, the Home Ownership and Equity Protection Act, the rules -- which will apply to all lenders, not just banks -- are expected to, among other reforms:
- Restrict lenders from penalizing high-risk borrowers who pay off loans early.
- Bar lenders from making loans without proof of a borrower's income.
- Require lenders to make sure that borrowers set aside money to pay for taxes and insurance.
Economist Peter Dawson told BloggingStocks he's taking "a wait-and-see approach" regarding the Fed's mortgage regulation revisions. "This set of revised regulations could be, arguably, the most important federal regulation change, in financial terms, since the last plan to maintain the solvency of the Social Security trust fund," Dawson said.
Of critical importance, in Dawson's interpretation, will be any new regulations and/or regulation changes regarding the 'front-end' (mortgage debt to income) and 'back-end' (all household debt to income) debt ratios. In conjunction with income, down payment and FICO scores (commonly known as credit scores), the ratios determine the maximum an adult can borrow, Dawson said.
Lenders and consumer groups are likely to critique the Fed's new regulations in a number of areas, Dawson said, with the biggest battles centering on debt ratios, if addressed by the Fed.
During the 2002-2007 housing boom ratios varied wildly across the nation, Dawson said. "As housing prices kept rising at 10% and 15% annual rates, we went from a mortgage system where debt ratios were raised, then, in some markets and loan types, ignored," Dawson said. "This could only end badly and it did with the rise in mortgage foreclosures, so it will be interesting to see how the Fed addresses debt ratios."
Housing Analysis: Without question, given housing's importance in the U.S. economy, next week's new/revised mortgage regulations will be a "public policy action of significance" by the United States. The Fed has to come with a plan that's fair, transparent, and conducive to expanding home ownership, while also not restricting a lender's ability to recruit loans and profit from loans. And the Fed has to do this in an election year, with a U.S. Congress (and probably two presidential candidates) ready to pounce on any restrictive, problematic, or ill-conceived reform. That's not a light task. Here's hoping the Fed gets it right with its first announced reforms.
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Reader Comments (Page 1 of 1)
7-09-2008 @ 7:47PM
william lindblad said...
If anything has ever been the proverbial "crock of ----", this is it. The very rules that are now being proposed were in effect at every bank in this country from at least 1950 to 1980. Where have those in charge been? Changing those rules led to the RTC and the same can be said for now, which is a repeat, but on a monumental scale.
The horse is out - close the barn door!.
In reality, these changes are going to compound the credit situation as they will stiffle recovery. Recovery may take a fews years but this policy will tie the hands of the banks and keep lending tight.
Bernanke, this is STUPID policy and the history books will call you DODO for it.
7-10-2008 @ 10:46AM
Mike said...
I agree, the only rule that should be observed is that government is forbidden to bailout banks or investment firms. Risk without risk, what a brilliant concept.